COMMENT: OffshOrE

PES: Europe10

Context in the UK

The European Renewable Energy Directive sets the UK a target of achieving 15 per cent of total energy from renewable sources by 2020, and the UK government expects that the electricity sector will make the largest contribution towards this target. In addition, the UK is facing the huge investment challenge of replacing large amounts of coal fired capacity being shut down by the EU’s Large Combustion plants directive and large amounts of nuclear power due to retire over the next 10 years.

Increasing the share of PV in the UK electricity market can support its energy transition, however measures to support solar must be sustainably designed.

With a paltry 50 MW of Solar PV installed in 2009 the UK is far behind Germany (with 9800 MW installed in 2009). However the introduction of FITs in the UK in April 2010 is having an impact. Industry regulator Ofgem reported 10,552 PV installations in the first six months of the scheme amounting to an additional 26.4 MW.

As the UK gets serious about PV it is worth looking at the trends going on in Europe.

PV boom and backlash

European PV installation has grown rapidly in recent years. Conservative estimates of 8.9 GW installed in 2010 published by the European PV Industry association still in April 2010 are likely to be exceeded. Germany alone will have reached 7-8 GW, while latest numbers from Italy indicate a market approaching 2 GW in 2010. This compares to only 2 GW being installed in all of Europe as recently as 2007, with Spain being the growth engine then, just for one year between publication of the Royal Decree 661/2007 and September 2008, when a more restrictive

regulatory framework came into force. This boom is due almost entirely to the FITs implemented in Europe.

FITs are schemes which pay the owners of PV (or other renewable energy) systems a tariff above the market price for electricity generated by renewable energy installations. This provides guaranteed returns on a PV investment, typically for a long period of time (20 or 25 years), which makes the projects bankable and attractive to investors. The current UK FiT rates for small PV schemes fitted to existing houses imply IRR’s around 7 per cent depending on the system cost and how much electricity is generated. The costs of the FiT are ultimately passed to energy consumers, through higher electricity bills. On the back of the German FiT in particular the market rapidly built up capacity and drove costs down through technological improvements and economies of scale.

However a combination of overly-generous FITs, underestimates by governments and industry bodies of the installations FITs would drive, comparatively slow government reactions to adapt the system have resulted in increasing costs of FITs, overly-attractive margins along the PV value chain and belated attempts to make the support schemes more sustainable.

For example in 2000 when Germany’s Renewable Energy Act (EEG) was introduced, Germany was roughly where the UK is today with 74 MW of installed PV. Between 2000 and 2009 the market grew by 72 per cent a year and in 2009 there was 9.8 GW installed. Estimated numbers for 2010 indicate that another 7 GW was installed in that year alone. This rapid growth has exceeded both government and industry body forecasts and led to higher than expected costs. The 3.8 GW of PV capacity added in 2009

alone could attract tariffs well over €1bn per year for the 20-year life of payments (depending on the exact mix of the capacity and its load factor). High scheme costs have caused a public opinion and policy backlash with consumer protection advocates, energy economists and many supporters of renewable energy growth warning of excessive costs to the final consumer.

The dynamic growth of installations and the ensuing long term costs incurred by the FiT have forced the German government to introduce additional non-scheduled reductions during 2010. The first two weeks of 2011 saw an agreement by the Ministry of the Environment and the Solar Industry association to bring forward scheduled reductions in the FiT by six months and reduce rates again in July 2011.

A similar pattern of overly generous subsidies prompting a rapid influx of investment and higher than expected costs followed by attempts to scale back subsidies or cap/pause the market has been observed already in Spain after record growth in 2008, and is being repeated in France and the Czech Republic, with Italy seemingly on the brink. In the case of Spain, the cap and FiT corridor scheme set by regulation in September 2008 checked the uncontrolled capacity growth of previous periods. Frequent tariff reviews are key in the design of the framework. PV is the most “dynamic” of all the renewable energy technologies (shorter construction lead times, flexibility in terms of minimum size and scalability, most fragmented and competitive supplier structure) requiring specific control mechanisms. FiT schemes in PV must bring a sufficient incentive, but have to be able to control the market to avoid excessive support costs.

solar photovoltaic electricity in the UK: lessons from the European experience

COMMENT: sTrATEGY

Solar Photovoltaic (PV) electricity is poised to become a significant and competitive supplier to the European electricity market. The UK has traditionally lagged behind markets like Germany, however, the introduction of a Feed-in Tariff (FiT) is changing the scene. Whilst boosting the share of PV can contribute to reaching the UK’s ambitious renewable energy targets, there are lessons for the government and the domestic market from the European experience.

Words: Richard Forrest

COMMENT: OffshOrE

www.pes.eu.com 11

While the UK scheme does not cover large installations as the German scheme does, and smaller installations attract higher FITs, early figures from Ofgem show that 10,552 PV installations occurred in the first six months of the FiT amounting to 26.4 MW. On average the installations were 2.5 kW indicating the market is attracted to the higher subsidies for smaller rooftop installations.

With the scheme only just getting underway there is a prime opportunity for the government to establish clear control mechanisms.

Increasing competition in the PV supply market

While the German scheme initially grew the German PV industry, the expansion and entry of Chinese players has put increasing pressure on prices for manufactures. This has resulted in some manufacturers integrating downstream and altering their go-to market strategies – a trend we expect to continue as vertically-integrated Chinese players like Yingli and LDK enter the market.

Increasing pressure on sellers combined with increasing scale and mainstream awareness of PV has resulted in the greater attempts by PV companies to differentiate themselves through consumer marketing. Direct appeals to the end users through television and other media advertisements have been increasing in Germany.

Overall, the rapid reduction of system prices since late 2008 underlines the technology’s potential to reach competitiveness in the mid-term in European markets. While an increasing share of module production will migrate outside Europe, this is balanced by a decreasing share of the module cost in the overall lifetime value generation of a PV system. For the UK this means a greater amount of investment in the downstream end of the PV value chain.

Smart grid development

Wind and PV have common interests, such as grid development, CO2 awareness, smart grids and metering, financing needs, resource mapping and forecasting, and proving the feasibility of

distributed generation and “Virtual Power Plant” concepts (ability of PV in combination with wind and biomass to create a dispatchable source of energy). The mainstream integration of PV in the UK will promote energy efficiency and sustainability across the board. By increasing the share of distributed power generation, it will reduce network losses and contribute to the emergence of “smart” electricity distribution systems that facilitate other forms of renewable energy and can be combined with emerging trends in the electric mobility sector (electric vehicle plans and pilot deployments are already a reality in many countries across Europe). PV can be a key element in the development of new grid concepts and integrated solutions for grid management.

Lessons for the UK government

Market developments must be constantly monitored and the FiT subject to regular review against well known, transparent criteria and adjusted rapidly reflecting the dynamism of the PV market in order to ensure targets are met while costs are contained.

National grid

The national grid should view the introduction of PV as an opportunity to push the development of the UK’s smart grid. The introduction of PV systems can provide an additional spur to the development of intelligent decentralised grid management which can accommodate other future energy options, including integration of an increasing proportion of intermittent/non-dispatchable energy sources and advanced demand response solutions (i.e. home interfaces, use of electric vehicles as energy storage, and bi-directional metering).

Utilities

Utility sector companies with generation assets and established end-user relationships must consider PV development as an opportunity and become proactive PV investors and marketers to maintain and expand their market share. There seems to be strong potential for partnerships between utilities with established customer bases and PV manufacturers looking to enter the UK market, especially

if the PV technology evolution continues to fulfil cost-curve expectations. With the rising prominence of brand in PV, partnerships offer the ability to leverage an established energy brand.

The PV industry

The PV industry in the UK is only just establishing itself. So far a common PV model has been for companies to offer free installation of the system in exchange for the FiT revenues while householders benefit from reduced electricity bills. It remains to be seen if this model will be common as householder knowledge of the FiT revenues available becomes more common. It is likely that the industry will have to diversify its models offering a wider range of financing, revenue sharing and installation options.

Industry groups

Industry groups and lobbyists in the UK must be prepared to be more realistic in their expectations of the UK FiT and

accept that the returns in Europe were due to over-subsidisation.

Conclusion

With the government’s commitment and the introduction of FITs, PV is poised to become a greater part of the UK’s energy mix, presenting opportunities for investors and delivering a lower carbon economy. By heeding the lessons from Europe and by observing the emerging market trends the UK industry can deliver these benefits at a substantially lower cost than other markets while driving innovation and growth across the PV supply chain.

Richard Forrest is a partner and head of EMEA Energy and Process Industries Practice for A.T. Kearney, a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading corporations across all major industries. A.T. Kearney’s offices are located in major business centres in 37 countries. For more information, please visit www.atkearney.com.

COMMENT: sTrATEGY

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